Small Business Job Creation

Chad Moutray Martek Biosciences was founded in 1985. From its early roots in the University of Maryland’s Technology Advancement Program, it has evolved into one of the nation’s fastest growing technology companies (according to Forbes magazine’s February 2006 poll). The primary reason for its success is its development and production of two essential nutrients for infant brain and eye development. Although these two nutrients occur naturally in human breast milk, Martek’s compounds are derived from naturally occurring algal and fungal sources. Martek has patented processes for producing these compounds, which are now a staple in infant formulas.

Martek’s success story is similar to that of many other firms that have capitalized on innovation and technology to grow to new heights. In the process, it has moved from being a small business to a much larger one, with several locations and over 600 employees. And like many others, Martek benefited from an incubator program for early-stage technology companies – the University of Maryland’s Technology Advancement Program. This program has been successful in nurturing inventions and companies since its inception in 1986.

The Importance of Small Business Innovation. Small business innovation, as illustrated by this example, can lead to greater profits for the firm and more employment for the local community. Many high-growth, innovative new firms, like Martek, get their start as commercialized ventures resulting from research that was conducted at a university. In fact, Advocacy research has shown a positive relationship between research and development spending at universities and firm births in the surrounding areas.

Economist William Baumol writes about this phenomenon in the most recent edition of the Small Business Economy. Large firms tend to be more risk-averse with their research and development spending. Their research and development is geared toward staying ahead of the competition, often by making small, incremental changes to existing products and processes. Small firms, on the other hand, can afford to “go for broke” with a new innovation that might be a breakthrough. If successful, these entrepreneurs will be able to grow their companies, the market, and the overall economy.

Once again, Advocacy research backs up this thinking. In 2003, a research study commissioned by Advocacy found that small patenting firms produce 13 to 14 times more patents per employee than their larger patents are more likely to be cited in other patent applications, which suggests that these innovations are more technologically and scientifically important.

Innovation and Net Job Creation. Small businesses that produce and patent valuable innovations rarely stay small for long. Martek is a prime example. Bringing a useful and innovative product to market generates spiraling demand that forces firms to grow quickly to keep up with it. This means investing resources in new plant and capital, as well as hiring many new employees.

The Bureau of Labor Statistics analyzed employment dynamics between September 2002 and March 2005 and found that 65 percent of the net new jobs created in that window stemmed from firms with fewer than 500 employees. This is consistent with data from the U.S. Census Bureau which has shown 60 to 80 percent of the net new jobs coming form small firms annually over the past decade. Clearly, small businesses are the engines of growth for the economy. Moreover, research shows that job growth occurs in firms with fewer than 20 employees in the first two years of operation. These startups can have a large impact on employment. For this reason, entrepreneurship is seen by many communities as the catalyst that will “jump-start” their economic base. many new firms, though, will never grow beyond a certain size. Thus, there are attempts to identify the ones that will, and to nurture them through business incubator programs and other means. (Such fast-growth firms are often referred to as “gazelles.”)

For America to retain its technological and competitive edge, it must embrace the entrepreneur. Thanks to small business ingenuity, more Americans will be employed and the overall economy will be stronger.

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